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The United States in the limelight

Earlier this week the US was in the limelight. The whole world awaited the final results of what seemed to be a tight race between President Barack Obama and Mitt Romney, and in the background the ‘fiscal cliff ’, one of the most prominent post-election issues, continued to make headlines as investors eagerly waited for new direction.

The man in the Presidential seat will have to deal with the fiscal cliff
- Rudolf Muscat

If we move a step backwards, to the end of last week, we also had some interesting data out of the world’s largest economy. Friday’s payroll data were positive, with actual figures showing that the US economy created 171,000 new jobs throughout October. Interesting number, but with what should we compare such a figure?

Well, if we compare it to what was created in September, we note an increase from +148,000, which in turn was also revised higher from the originally stated +114,000. Economic data are not only presented against previous figures but also against what had been expected. In our case, with expectations lying in the region of +125,000, the outcome was better than expected.

The man in the presidential seat will have to deal with the fiscal cliff – the combination of both spending cuts and tax increases due by early next year in the US. The tax increases are resultant from a number of previously introduced tax cuts that will reach expiration by the start of 2013, while the spending cuts are mostly being triggered by the sequester (a budgetary enforcement tool).

In the immediate term speculat-ors were expecting an Obama victory to trigger an initial sell-off for the US dollar. With regard to tackling the fiscal cliff, a reactionary approach as opposed to a pro-active approach should be expected to impact negatively on the USD. To the contrary, a clear direction for the deficit cuts required over the 10-year period should be positive for the USD.

If we have a look at the daily EUR/USD chart, we note that the bullish trend visible after hitting lows of 1.2042 last July seems to have lost steam at the highs of 1.3172, reached on September 17. Since then, the currency pair has mostly engaged in a range between 1.2763 and 1.3139. For the current week we are expecting price moves higher to be resisted in the range of 1.2963 to 1.3091. On the other hand, price moves lower are expected to be initially capped in the region of 1.2693 to 1.2764. A clear break of these regions should be indicative of further price action.

Early last Tuesday, the Reserve Bank of Australia was due for a rate decision. The Australian Central Bank in the end decided to stay on hold at 3.25 per cent, defying expectations that it might cut interest rates by 25bps. The AUD climbed to the highest level since September as investors reconsidered their positions.

In its comments, the board judged that given that inflation was expected to be consistent with the target and growth expected to be close to trend, even with a more subdued international outlook, the stance of monetary policy remained appropriate for the time being. The AUD/USD hit five-week highs at 1.04445, getting a 60 pip boost just after the RBA announced its decision.

Gold slipped by 2.82 per cent (from open to close) throughout October, as it is close to retracing 50 per cent of the bullish trend seen from August 21 to October 5 of the current year. Is it game over for the yellow metal? Likely not.

October turned out to be negative, but only after gaining close to five per cent throughout September. Historically, statistics for the price of gold suggest that November tends to be one of the strongest months when it comes to seasonality.

Taking the broader view, even if growth continues to improve, it will likely be gathering pace slowly and would thus not warrant immediate policy normalisation from the Central Banks. This is why gold will likely not lose steam so easily.

Upcoming FX Key events
Today: UK BoE Interest rate decision and asset purchases target, EZ ECB interest rate decision and news conference, and US trade balance.
Tomorrow: German CPI and US Preliminary Michigan consumer sentiment.

Technical key points
EUR/USD is neutral.
EUR/GBP is bullish target 0.8220, key reversal point 0.7950.
USD/JPY is bullish, close to reversal point.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

[email protected]

RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicit-ation and is provided for inform-ation purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of public-ation. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third-party liability, are accepted by RTFX or any director, officer or employee.

Mr Muscat is a senior trader at RTFX Ltd.

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